A few years ago that noted economist P. J. O' Rourke opined that deciding whether to buy stocks or not was easy. He pointed out:
"We baby boomers have caused everything since 1946. We'll keep buyings stocks until we retire. But when we hit sixty-five, we're going to sell stocks. And the stock market is going to go down. And we're going to wet ourselves." (Eat the Rich)
As usual, PJOR was more right than the real economists, whoever they are.
BEGS 2010
The recent Barclays UK Equity-Gilt Study (which unfortunately isn't available on-line although you can buy it at £100 a pop, if you're especially interested) makes some interesting observations about the effect of demographics on markets. You might expect that when the surge of post-war Baby Boomers starts to retire and begins looking for income then you'd see a decline in the funds invested in stocks and a surge in those invested in bonds. As the study points out this, in fact, is exactly what was seen in Japan in the 1990's and now appears to be what we're seeing in the US: the fit of the curve of people approaching retirement, saving hugely for it and then slumping into a blissful Third-Age is very close to that of the changes in US market valuations.
Of course the lessons of Japan aren't especially encouraging – the massive run up in asset valuations in the late 1980's and early 1990's presaged a bust of biblical proportions and a long, long uphill struggle for equity markets. It also led to the oddity of the yen carry trade as the Japanese Central Bank cut interest rates to zero to encourage Japanese savers to invest in the economy. Instead investors, desperate for income, and speculators, greedy for easy profits, borrowed very cheap yen and invested in higher yielding overseas securities.
Demographic Nosebleeds
Estimates of how much was staked on this currency arbitrage vary but it's certainly in excess of several trillion dollars. Some of this found its way into various other Ponzi schemes like US sub-prime property: what goes around, comes around. Worse, it's always been hot money because investors are scared that exchange rates may go against them – on the slightest sign of a problem the money's repatriated.
Some of the direct ramifications of this demographic effect in Japan have been…
